Thursday, September 28, 2023
BusinessESX plans to develop Shariah-compliant capital market products

ESX plans to develop Shariah-compliant capital market products

Management of the newly established Ethiopian Securities Exchange (ESX) is eyeing the abundant resources in the Islamic finance sector for the development of Shariah-compliant capital market products.

Planning to introduce various financial instruments that comply with Shariah law, the executives of the ESX said they will work to “integrate Islamic finance principles into the capital market framework.”

In information provided in writing to The Reporter, the ESX project team shared that they will create a capital market environment “where innovative financial instruments can be issued and traded,” with the aim of tapping into the resources of Shariah-compliant financial institutions.

The idea of interest-free financial services started growing recently in Ethiopia, even though there is a large Muslim community. However, the business opportunities for Islamic finance users to invest are not growing at the same rate as deposit mobilization, explains Tilahun Kassahun (PhD), Senior Project Manager at the ESX.

“There is a huge amount of money not being financed, so these are the funds we are going after,” said Tilahun.

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During the first nine months of the current financial year, 14 banks with special windows and full-fledged operations in interest-free, Shariah-compliant banking services had mobilized 163.7 billion birr in deposits.

However, information obtained by The Reporter showed that only 30 percent of these deposits went toward funding businesses, indicating significant untapped potential in the sector.

Over 88 percent of the 163.7 billion birr in interest-free deposits were held through the Commercial Bank of Ethiopia’s (CBE) special window.

During the previous financial year, of the 117 billion birr deposited in the Shariah-compliant, interest-free banking system, around 35.5 percent had been directed to business financing. That year, CBE had mobilized 69.6 billion birr total, allocating only 9.3 billion birr specifically for financing businesses.

The instruments ESX will introduce to utilize such resources will include Sukuks, Islamic stocks, and Islamic mutual funds, according to information from the Exchange.

Sukuks are Islamic bonds that provide returns based on profits from underlying assets.

Stocks are shares of companies operating in accordance with Shariah principles, and funds will be portfolios of investments in assets managed by fund managers following Islamic guidelines.

Whether an issuer is a government office or corporation, a bond can be issued as a Sukuk instrument to raise funds for any development initiative, according to ESX’s document.

Through the growth of Islamic finance, especially within the capital market ecosystem, ESX project teams plan to also attract foreign investment from other economies with well-established Islamic finance markets.

“This not only serves Ethiopia’s Muslim community seeking Shariah-compliant investment options but also contributes to diversifying the overall financial landscape,” reads ESX’s statement to The Reporter.

Banks and other financial institutions established with Islamic principles will also play “key roles” as advisors, issuers, and investors of the products. 

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